A bank’s perspective on PPP projects 2016.6.15

Main contents Why PPP projects become popular Why banks are involved and the challenges we are facing How banks evaluate PPP projects Advice to ensure success

Why PPP projects become popular The government has a plan for the project, but is limited by the budget. The private sector has the willingness and ability beyond mere construction.

A PPP project: An cooperation between the public and the private sector, in which the government and the private sector carry out a project together on the basis of an agreed division of tasks and risks, each partly retaining its own identity and responsibilities. Characteristic: Risk sharing, benefits sharing.

PPP vs. conventional construction model Risk bearing: the private sector takes more risks Basis of the contract: performance-based evaluation Length of the contract: long-term contractual arrangements

Benefits: Public sector private sector Off-balance sheet Cost efficiencies Shorter time to delivery Better management Fixed return on investment Improve image

Why banks are involved Invited by the private sector PPP projects: large amount, long term, more risks Use leverage The result: most funds come from banks

Challenges banks are facing Uncertainty Repayment source ---future cashflows of the project Long term No guaranty No recourse to sponsors Only project asset and long-term operation contract

How banks evaluate PPP projects Economically viable Stable environment (including laws and policies) Consistent support from public sector Experienced and capable private sector Clear contracts

Some considerations in evaluation and structuring : Challenge important assumptions in the project feasibility study Monitoring of the cashflows Regular review and comparison of the project performance with the feasibility study Different guaranty requirements in different stages: construction period, operation period

High-way projects Used to be financed by the central or local government More constructors become investors and operators How a bank views the project: Large investment, large initial input and later operational cost Long term, higher risk Source of repayment is limited, e.g. traffic volume not guaranteed, hence the income of the project Stability of relevant policy, e.g. transfer time, lift road tolls on holidays No guaranty

What the bank expect Safety: repayment of interests and principals Source of repayment: volume, charge rate, allocation of the income Guaranty: government’s commitment pledge of charging rights Other requirements: sponsors’ guaranty before the completion of the project, charge or monitoring of the charge collection account Profitability: at least cover the funds cost and overhead costs

Some advice to ensure success A well interest-balanced structure Trust among the parties involved Appropriate flexibility on all sides and be open-minded for adjustments in case of need

Wish you success!